It is well known that investors' attitude toward risk changed immensely during and after the bear market of 2007-2008. The shift toward safer fixed income choices and a reduced reliance on equity funds is seen in the flows data. For 2008 investors withdrew nearly $73 billion net from equity funds (after a net purchase of $179 billion the year before), and added $64 billion to taxable and municipal debt funds. In 2009, equities attracted a paltry $5 billion in net flows, while the pair of bond fund groups took in a whopping $465 billion net (all flows figures include exchange-traded funds). Equity markets might yet string together two years of double-digit gains, but equity funds are still attracting less than $1 for every $2 going into bond funds.
This preference for bond funds makes me wonder: Did investors do a good job picking funds? A database of investor trades would be immeasurably helpful to answer that question; but, that's not something we track at Lipper. What we can see are flows and performance. To start with, let's exclude money market funds. We'll construct our analysis in quadrant form, where fund flows during 2009 (positive/negative) are along the bottom (x) axis and performance in 2010 (above/below average) is along the side (y) axis. For our purposes, when investors sold a fund that achieved above-average performance the following year, they made a mistake. Likewise, when 2009 net flows were positive and the fund was an above-average performer for 2010, investors collectively made a good decision.
Some of the some of the hottest areas for flows in 2009 went to the better performers of 2010. Of the estimated $465 billion net that fixed income funds drew in 2009, approximately $43 billion went into funds located in Lipper's Short-Intermediate Investment-Grade Debt Funds classification. Fortunately for those investors, they put most of their money in the right place, since over $32 billion (of the $43 billion total) went into upper-right (#2) funds. Top recipients included Vanguard Short-Term Investment-Grade Fund, Vanguard Short-Term Bond Index Fund, Lord Abbett Short Duration Income Fund, and PIMCO Low Duration Fund. Another $11.9 billion net went to funds in the group that were later below-average performers, such as iShares Barclays 1-3 Year Credit Bond Fund ETF and T. Rowe Price Short-Term Bond Fund.
The biggest draw for 2009 Intermediate Investment-Grade Debt Funds had total net flows of over $90 billion, and over half of that went to PIMCO Total Return Fund. Not only did that fund take in nearly $50 billion net for 2009, it also performed (with a solid 8.8% return) in the top 25% of its peer group for 2010. Its sister portfolio, PIMCO Investment Grade Corporate Bond Fund, trailed far behind, taking in about $3.1 billion net for 2009. But it turned out to be the better performer for 2010, gaining 11.3%. The greatest disappointment was Vanguard Total Bond Market II Index Fund, which took in $12.5 billion net for 2009 but ended with a 5.8% return; the bottom 8% of its peers for 2010.
Investors misjudged a few others as well. Large-cap value funds have seen outflows every year since 2007. For instance, MFS Value Fund drew in $2.7 billion net for 2009, but mustered only an 11.4% return for 2010, placing it in the bottom 26% of its peers. Investors drained nearly $1.9 billion from Invesco Van Kampen Comstock Fund, but the fund returned 15.6% for 2010 and was a top- quartile performer since 2009. Investors were particularly bad at choosing short municipal debt funds, sending over $5.2 billion net to Vanguard Short-Term Tax-Exempt Fund and receiving only 0.95% in return for 2010.
Net flows in 2009 show that investors allocated nearly $91 billion more to 2010's top-half performers than they did to the bottom-half ($390 billion compared to $299 billion).
Jeff Tjornehoj is research manager for Lipper in the
U.S. and Canada. His responsibilities include general
industry knowledge, performance, flows and methodology.